venture of Co-operative Bank PLC that went live last week.

Smile follows in the footsteps of Egg, Prudential Banking PLC's year-old virtual offering. It is about five months ahead of Halifax PLC's Internet arm, code-named greenfield.co.uk, which is led by James Spowart, formerly managing director of the telephone-based Standard Life Bank.

Mervyn Pedelty, chief executive officer of $10 billion-asset Co-operative, said Smile offers the best current account, which is similar to a checking account in the United States, on the market. It is free and pays 4.07% annually on balances, which is 40 times the 0.1% that is standard at Barclays, Lloyds TSB, and National Westminster Bank.

Nick Jones, an electronic commerce analyst at Jupiter Communications in London, said he "wasn't impressed by the Smile launch." He said the 4% interest rate is bound to be bettered by "a building society or smaller bank out there -- for example, the Clydesdale (Bank) has a high-interest current account that pays 6%."

Smile is also offering a credit card with an annual percentage rate of 5.9% until April 30, after which it becomes 12.9%. For Smile current-account holders those rates are 4.9% and 9.9%, respectively.

"The Co-operative Bank has always been the most innovative of U.K. banks," said Mr. Pedelty. "We were one of the first to embrace call centers and sales and service branches. We were also the first to have a deal with the British Post Office."

The relationship with the post office gives Co-operative and Smile customers access to 18,000 post office centers for counter service. Co-operative, a mutual organization of food distributors, also offers banking facilities in 250 grocery stores owned by its members. It is part of the Link automated teller machine network, which has 25,000 machines in the United Kingdom.

"We were also one of the first to launch Internet banking and a free banking service for all accounts on the Internet," said Mr. Pedelty. Co-operative's Internet service has been around since March 1998.

Before launching Smile "we did customer research," said Mr. Pedelty. "We could see the importance of the Internet to electronic commerce and financial services. We were also interested in keeping our customers and attracting noncustomers." Part of the research meant looking at the strategies of U.S. Internet-only banks, Net.Bank and Wingspanbank.com, and Sweden's SEB.

The research showed that there was latent demand for a full Internet bank rather than an Internet channel. The company surveyed "consumer attitudes -- like what they thought of traditional banks and how they viewed new brands and names"

"Some of the positives of a clearing bank, like us, were that it was financially strong, trustworthy, honest, and ethical," said Mr. Pedelty.

He added that there was "obvious cynicism" associated with the big-bank names, many of which were considered to be "unfriendly, faceless, bureaucratic, and not good value."

The result, therefore, was to adopt a new brand that could convey a "contemporary and modern" feel but had the backing of a stable financial institution. "Smile immediately communicated that it was friendly, not faceless," Mr. Pedelty said.

Smile is managed as a separate division of 127-year-old Co-operative Bank. It offers a current account, a student current account, savings, loans, and credit cards, but does not expect to offer mortgages until next year.

Those who pre-registered for Smile before its launch date received a preferential sign-up rate. "We offer a special current account for students at university," said Mr. Pedelty. "We pay a good credit interest rate and there's no charge for an overdraft of up to $3,200."

He said he expects Smile to develop into an e-commerce site. "We're looking at expanding the products on the site to include investments, mutual funds, and brokerage," he said.

He said he is also actively working on partnerships with nonfinancial companies. The co-operative movement in the United Kingdom. already has a large travel sector and Mr. Pedelty said he would like to see Smile eventually offer travel services and tours, books, music, flowers, information services, and wines and spirits with Internet ordering and delivery.

By spring, he said he expects Smile to have introduced an electronic wallet to assist in on-line purchases. "We also want to have clever engines that will allow you to organize your regular payments at the most advantageous time for you to maximize the interest on your balances."

Smile does not charge customers for speaking with telephone staff, unlike other banks which might charge as much as $8 a call, he said.

Co-operative has five call centers in the United Kingdom that are staffed with 2,000 people. Smile's telephone service is based in Stockport in Greater Manchester and employs 50.

"We're a real Internet bank," said Mr. Pedelty. "We really have good-value products, and we will reward customers for building their relationships with us."

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